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Earning passive income: How to successfully build wealth

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Generating additional income

Passive income is the term used to describe a type of income which does not require direct services by you in return. This means you receive income without actively working for it. This offers the advantage of increasing income without major time investment or labour. However, it is necessary to allow for a certain amount of effort in advance in order to prepare the passive source of income. Nevertheless, a high start-up capital is not necessary in every case. It is possible to receive passive income without start-up capital if you have a clever idea, staying power, ambition and the will to immerse yourself in a subject area. There are some passive forms of income, for example investments in shares, ETFs or other securities or the purchase of real estate, for which it is essential to have a certain amount of capital.

The best ideas to earn money passively

There are various ideas and approaches that you can adopt to build passive income. They all have different risks, requirements and potential returns, and the expense also varies. Before you decide on a specific path, it is advisable to think about which of the options fit your life situation, how feasible it is, how much time and money you can and want to invest to generate a second income and how willing you are to take risks. You should also realistically examine the probability of success of the respective ideas.

Build passive income with real estate

A classic way to generate passive income is to invest in real estate. By renting out the property, the owner receives monthly rental income without having to work for it. However, investing in real estate requires a large amount of start-up capital. Usually one will need to take out a mortgage which will need to be paid back with interest. Also, the effort involved up front should not be underestimated. Even if the property will be purchased and rented out, you as the owner will have to take care of the renovation, maintenance and necessary repair work. With the right calculation, however, it is possible to estimate the rent at a level that allows sufficient profit. If this is successfully implemented, real estate ownership offers attractive income opportunities with a relatively low risk, as real estate is still considered a crisis-proof form of investment. This means that the risk of loss is extremely low.

ETF savings plans for passive income

Passive income through shares and ETFs are also a common way to make additional profits. The income here is earned from the dividends of the securities. However, a certain amount of starting capital is also necessary. In addition, there are differences between ETFs that distribute dividends and so-called accumulating ETFs. The latter do not distribute the dividends but acquire new shares directly with the income generated. This means that no direct income is available, but they are better suited for long-term asset accumulation. However, it is also conceivable to combine both variants, so that you as an investor can both receive short-term dividends and build up assets over the long term.

Passive income via the internet

One of the newer ideas for passive income is to generate income online. There are various approaches that can be used to generate profits in this respect. Anyone who has their own internet presence, such as a website or blog, can use affiliate marketing to earn income. This is where you place a link to a specific offer on your site, and with each successful transaction via this link, you receive a commission. If you share videos via a YouTube channel, you can display ads here and earn money passively. Advertising is also a way to build income for a website and blog. In this case, the better the Google rankings for the relevant search terms, the better the prospects of earning money through advertising.

To generate immediate income, ETFs that directly pay out their dividends are a good choice

Pros and cons of passive income

There are several advantages to building up additional sources of income. If the income brings steady earnings, this enables an improvement of one's financial situation. Furthermore, as a recipient of passive income sources, you act independently and are flexible, as you are no longer dependent on fixed working hours and locations. The time saved is another advantage, since you receive additional income but do not have to invest a lot of time to earn it. Ideally, it is even possible in the long term to replace part of one’s regular salary with the passive source and work less. On the other hand, there are several disadvantages. Especially in the initial period, there is no certainty. The amount of passive income may fluctuate. In addition, passive income is not entirely feasible without effort, because it is crucial to inform oneself in advance about the respective source of income and to carry out ongoing checks and take care of administrative tasks. Some sources of income, for example shares and ETFs, also come with a risk that is difficult to calculate. Therefore, it makes sense to only make investments when the money is dispensable in everyday life.

Smart passive income: How it is taxed

Taxes are due on almost every form of income and thus also on passive or scalable income. This is independent of whether the earnings are made as a freelancer, website operator, full-time or part-time. How high the tax rate will be depends on the type of income. Passive income from shares or ETFs are subject to a final flat rate tax, which is payable on investment income, as well as the solidarity surcharge and possibly also church tax. As a self-employed person, you have to pay income tax on your passive income. Real estate property is subject to property tax, and rental income is also taxable. However, it is possible to reduce the tax burden, for example through depreciation. Furthermore, running costs for administration, repair and maintenance can also be deducted from tax. Interest payments for the real estate loan are also tax deductible.

Frequently asked questions

Written by:

Stefanie Aust, Guest Writer

Stefanie loves to put complex topics from the real estate world into understandable and inspiring words. Whether it's about the right financing, choosing the right type of flat, or a successful property search: Stefanie is happy to inform you.

Immowelt-Partner EVERESTATE GmbH

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